AFTER THE FINANCIAL CRISIS: REVISITING AUDIT COMMITTEE INDEPENDENCE

As the financial crisis recedes into history, it is time to turn renewed attention to the risk of fraudulent financial reporting.

Ironically, a big reason is that times are getting better. Corporate profits are up. Companies are again expanding. The stock market has more than recovered.

But with renewed economic viability comes increased pressure for financial performance. When times are bad, as they were not too long ago, the pressure for spectacular results eases as expectations are low and cash flow and survival are at the top of the agenda. It is as good times return that the pressure for financial performance builds. And with that pressure comes the risk of performance exaggeration.

Some early warning signs are emerging. The US Securities and Exchange Commission has announced a new Financial Reporting and Audit Task Force and the development of enhanced computer searching capabilities to seek out telltale signs of fraudulent financial reporting. The SEC also reports that whistleblower tips are pouring in. Beneath the headlines, some audit committees find themselves needing to commission investigations of the sort that have been a blessed rarity over the last several years.

One problem, though, is that the investigative machinery has gotten rusty. In particular, some seem to have lost sight of a key feature that is often at the center of a financial reporting system that has gone astray. That is the culture of the company’s financial reporting environment.